International Financial Management Seventh Edition The McGraw-Hill/Irwin Series in Finance, Insurance, and Real Estate Stephen A Ross Franco Modigliani Professor of Finance and Economics Sloan School of Management Massachusetts Institute of Technology Consulting Editor FINANCIAL MANAGEMENT Adair Excel Applications for Corporate Finance First Edition Block, Hirt, and Danielsen Foundations of Financial Management Fifteenth Edition Brealey, Myers, and Allen Principles of Corporate Finance Eleventh Edition Brealey, Myers, and Allen Principles of Corporate Finance, Concise Second Edition Brealey, Myers, and Marcus Fundamentals of Corporate Finance Seventh Edition Brooks FinGame Online 5.0 Bruner Case Studies in Finance: Managing for Corporate Value Creation Seventh Edition Cornett, Adair, and Nofsinger Finance: Applications and Theory Third Edition Higgins Analysis for Financial Management Tenth Edition Hirschey and Nofsinger Investments: Analysis and Behavior Second Edition Kellison Theory of Interest Third Edition Jordan, Miller, and Dolvin Fundamentals of Investments: Valuation and Management Sixth Edition Ross, Westerfield, and Jaffe Corporate Finance Tenth Edition Ross, Westerfield, Jaffe, and Jordan Corporate Finance: Core Principles and Applications Fourth Edition Ross, Westerfield, and Jordan Essentials of Corporate Finance Eighth Edition Ross, Westerfield, and Jordan Fundamentals of Corporate Finance Tenth Edition Shefrin Behavioral Corporate Finance: Decisions that Create Value First Edition White Financial Analysis with an Electronic Calculator Sixth Edition INVESTMENTS Stewart, Piros, and Heisler Running Money: Professional Portfolio Management First Edition Sundaram and Das Derivatives: Principles and Practice First Edition FINANCIAL INSTITUTIONS AND MARKETS Rose and Hudgins Bank Management and Financial Services Ninth Edition Rose and Marquis Financial Institutions and Markets Eleventh Edition Saunders and Cornett Financial Institutions Management: A Risk Management Approach Eighth Edition Cornett, Adair, and Nofsinger Finance: M Book Second Edition Bodie, Kane, and Marcus Essentials of Investments Ninth Edition Saunders and Cornett Financial Markets and Institutions Fifth Edition DeMello Cases in Finance Second Edition Bodie, Kane, and Marcus Investments Tenth Edition INTERNATIONAL FINANCE Grinblatt (editor) Stephen A Ross, Mentor: Influence through Generations Hirt and Block Fundamentals of Investment Management Tenth Edition Eun and Resnick International Financial Management Seventh Edition Grinblatt and Titman Financial Markets and Corporate Strategy Second Edition ii REAL ESTATE Brueggeman and Fisher Real Estate Finance and Investments Fourteenth Edition Ling and Archer Real Estate Principles: A Value Approach Third Edition FINANCIAL PLANNING AND INSURANCE Allen, Melone, Rosenbloom, and Mahoney Retirement Plans: 401(k) s, IRAs, and Other Deferred Compensation Approaches Eleventh Edition Altfest Personal Financial Planning First Edition Harrington and Niehaus Risk Management and Insurance Second Edition Kapoor, Dlabay, and Hughes Focus on Personal Finance: An Active Approach to Help You Develop Successful Financial Skills Fourth Edition Kapoor, Dlabay, and Hughes Personal Finance Tenth Edition Walker and Walker Personal Finance: Building Your Future First Edition International Financial Management Seventh Edition Cheol S Eun Georgia Institute of Technology Bruce G Resnick Wake Forest University INTERNATIONAL FINANCIAL MANAGEMENT, SEVENTH EDITION Published by McGraw-Hill Education, Penn Plaza, New York, NY 10121 Copyright © 2015 by McGraw-Hill Education All rights reserved Printed in the United States of America Previous editions © 2012, 2009, and 2007 No part of this publication may be reproduced or distributed in any form or by any means, or stored in a database or retrieval system, without the prior written consent of McGraw-Hill Education, including, but not limited to, in any network or other electronic storage or transmission, or broadcast for distance learning Some ancillaries, including electronic and print components, may not be available to customers outside the United States This book is printed on acid-free paper DOW/DOW ISBN 978-0-07-786160-5 MHID 0-07-786160-4 Senior Vice President, Products & Markets: Kurt L Strand Vice President, Content Production & Technology Services: Kimberly Meriwether-David Managing Director: Douglas Reiner Brand Manager: Chuck Synovec Development Editors: Noelle Bathurst and Sarah Otterness Director of Development: Ann Torbert Marketing Manager: Melissa Caughlin Director, Content Production: Terri Schiesl Content Production Manager: Faye Schilling Content Project Manager: Judi David Buyer: Nichole Birkenholz Media Project Manager: Siva Kamar Compositor: Cenveo® Publisher Services Typeface: 10/12.5 Times LT Std Printer: R R Donnelley All credits appearing on page or at the end of the book are considered to be an extension of the copyright page Library of Congress Cataloging-in-Publication Data Eun, Cheol S International financial management / Cheol S Eun, Georgia Institute of Technology, Bruce G Resnick, Wake Forest University.—Seventh Edition pages cm Includes index ISBN 978-0-07-786160-5 (alk paper) International finance International business enterprises—Finance Foreign exchange Financial institutions, International I Title HG3881.E655 2014 658.15’99—dc23 2013041099 The Internet addresses listed in the text were accurate at the time of publication The inclusion of a website does not indicate an endorsement by the authors or McGraw-Hill Education, and McGraw-Hill Education does not guarantee the accuracy of the information presented at these sites www.mhhe.com To Elizabeth C.S.E To Donna B.G.R About the Authors Cheol S Eun, Georgia Institute of Technology Cheol S Eun (Ph.D., NYU, 1981) is the Thomas R Williams Chair and Professor of Finance at the Scheller College of Business, the College of Management, Georgia Institute of Technology Before joining Georgia Tech, he taught at the University of Minnesota and the University of Maryland He also taught at the Wharton School of the University of Pennsylvania, Korea Advanced Institute of Science and Technology (KAIST), Singapore Management University, and the Esslingen University of Technology (Germany) as a visiting professor He has published extensively on international finance issues in such major journals as the Journal of Finance, JFQA, Journal of Banking and Finance, Journal of International Money and Finance, Management Science, and Oxford Economic Papers Also, he has served on the editorial boards of the Journal of Banking and Finance, Journal of Financial Research, Journal of International Business Studies, and European Financial Management His research is widely quoted and referenced in various scholarly articles and textbooks in the United States as well as abroad Dr Eun is the founding chair of the Fortis/Georgia Tech Conference on International Finance The key objectives of the conference are to promote research on international finance and provide a forum for interactions among academics, practitioners, and regulators who are interested in vital current issues of international finance Dr Eun has taught a variety of courses at the undergraduate, graduate, and executive levels, and was the winner of the Krowe Teaching Excellence Award at the University of Maryland He also has served as a consultant to many national and international organizations, including the World Bank, Apex Capital, and the Korean Development Institute, advising on issues relating to capital market liberalization, global capital raising, international investment, and exchange risk management In addition, he has been a frequent speaker at academic and professional meetings held throughout the world vi Bruce G Resnick, Wake Forest University Bruce G Resnick is the Joseph M Bryan Jr Professor of Banking and Finance at the Wake Forest University School of Business in Winston-Salem, North Carolina He has a D.B.A (1979) in finance from Indiana University Additionally, he has an M.B.A from the University of Colorado and a B.B.A from the University of Wisconsin at Oshkosh Prior to coming to Wake Forest, he taught at Indiana University for ten years, the University of Minnesota for five years, and California State University for two years He has also taught as a visiting professor at Bond University, Gold Coast, Queensland, Australia, and at the Helsinki School of Economics and Business Administration in Finland Additionally, he served as the Indiana University resident director at the Center for European Studies at the Maastricht University, the Netherlands He also served as an external examiner to the Business Administration Department of Singapore Polytechnic and as the faculty advisor on Wake Forest University study trips to Japan, China, and Hong Kong Dr Resnick teaches M.B.A courses at Wake Forest University He specializes in the areas of investments, portfolio management, and international financial management Dr Resnick’s research interests include market efficiency studies of options and financial futures markets and empirical tests of asset pricing models A major interest has been the optimal design of internationally diversified portfolios constructed to control for parameter uncertainty and exchange rate risk In recent years, he has focused on information transmission in the world money markets and yield spread comparisons of domestic and international bonds His research articles have been published in most of the major academic journals in finance His research is widely referenced by other researchers and textbook authors He is an associate editor for the Emerging Markets Review, Journal of Economics and Business, and the Journal of Multinational Financial Management Preface Our Reason for Writing this Textbook Both of us have been teaching international financial management to undergraduates and M.B.A students at Georgia Institute of Technology, Wake Forest University, and at other universities we have visited for three decades During this time period, we conducted many research studies, published in major finance and statistics journals, concerning the operation of international financial markets As one might imagine, in doing this we put together an extensive set of teaching materials that we used successfully in the classroom As the years went by, we individually relied more on our own teaching materials and notes and less on any one of the major existing textbooks in international finance (most of which we tried at some point) As you may be aware, the scope and content of international finance have been fast evolving due to deregulation of financial markets, product innovations, and technological advancements As capital markets of the world are becoming more integrated, a solid understanding of international finance has become essential for astute corporate decision making Reflecting the growing importance of international finance as a discipline, we have seen a sharp increase in the demand for experts in the area in both the corporate and academic worlds In writing International Financial Management, Seventh Edition, our goal was to provide well-organized, comprehensive, and up-to-date coverage of the topics that take advantage of our many years of teaching and research in this area We hope the text is challenging to students This does not mean that it lacks readability The text discussion is written so that a self-contained treatment of each subject is presented in a user-friendly fashion The text is intended for use at both the advanced undergraduate and M.B.A levels The Underlying Philosophy International Financial Management, Seventh Edition, like the first six editions, is written based on two tenets: emphasis on the basics and emphasis on a managerial perspective Emphasis on the Basics We believe that any subject is better learned if one first is well grounded in the basics Consequently, we initially devote several chapters to the fundamental concepts of international finance After these are learned, the remaining material flows easily from them We always bring the reader back, as the more advanced topics are developed, to their relationship to the fundamentals By doing this, we believe students will be left with a framework for analysis that will serve them well when they need to apply this material in their careers in the years ahead We believe this approach has produced a successfuI textbook: International Financial Management is used in many of the best business schools in the world Various editions of the text have been translated into Spanish and two dialects of Chinese There is a global edition In addition, local co-authors have assisted in preparing a Canadian, Malaysian, and Indian adaptations vii viii P R E FAC E Seventh Edition Organization International Financial Management, Seventh Edition, has been completely updated All data tables and statistics are the most current available when the text went to press Additionally, the chapters incorporate several new International Finance in Practice boxes that contain real-world illustrations of chapter topics and concepts In the margins below, we highlight specific changes in the Seventh edition This part lays the macroeconomic foundation for all the topics to follow Part ONE Recent economic developments such as the global financial crisis and sovereign debt crisis of Europe Foundations of International Financial Management Updated coverage of monetary developments, including the euro zone crisis Globalization and the Multinational Firm Updated balance-of-payments statistics International Monetary System 29 Balance of Payments 64 Corporate Governance around the World 83 Review of corporate governance systems in different countries, the Dodd-Frank Act, and managerial implications This part describes the market for foreign exchange and introduces currency derivatives that can be used to manage foreign exchange exposure Fully updated market data and examples New section on non-deliverable forward contracts Integrated coverage of key parity conditions and currency carry trade Fully updated market data and examples This part describes the various types of foreign exchange risk and discusses methods available for risk management Systematic coverage of foreign currency transaction exposure management and a new case application Conceptual and managerial analysis of economic exposure to currency risk Part TWO The Foreign Exchange Market, Exchange Rate Determination, and Currency Derivatives 110 The Market for Foreign Exchange 112 International Parity Relationships and Forecasting Foreign Exchange Rates 139 Futures and Options on Foreign Exchange 172 Part THREE Foreign Exchange Exposure and Management 196 Management of Transaction Exposure 198 Management of Economic Exposure 231 10 Management of Translation Exposure 252 ix P R E FAC E A Managerial Perspective The text presentation never loses sight of the fact that it is teaching students how to make managerial decisions International Financial Management, Seventh Edition, is founded in the belief that the fundamental job of the financial manager is to maximize shareholder wealth This belief permeates the decision-making process we present from cover to cover To reinforce the managerial perspective, we provide numerous “real-world” stories whenever appropriate Part FOUR World Financial Markets and Institutions 270 11 International Banking and Money Market 272 12 International Bond Market 310 13 International Equity Markets 330 14 Interest Rate and Currency Swaps 354 15 International Portfolio Investment 372 Part FIVE Financial Management of the Multinational Firm 410 This part provides a thorough discussion of international financial institutions, assets, and marketplaces Fully updated market data and statistics Updated discussion on Basel 2.5 and III capital adequacy standards Updated discussion on the causes and consequences of the global financial crisis New Finance in Practice box on the Libor scandal New section on BBA Libor Fully updated market data and examples Updated empirical coverage of the features, characteristics, and regulations governing dollar denominated foreign bonds, Eurobonds, and global bonds Fully updated market data and statistics Updated discussion of market consolidations and mergers Fully updated market data and statistics Updated statistical analysis of international markets and diversification with small-cap stocks 16 Foreign Direct Investment and Cross-Border Acquisitions 412 17 International Capital Structure and the Cost of Capital 439 This part covers topics on financial management practices for the multinational firm 18 International Capital Budgeting 465 Updated trends in cross-border investment and M&A deals Updated political risk scores for countries 19 Multinational Cash Management 484 New analysis of home bias and the cost of capital around the world 20 International Trade Finance 495 Updated discussion of multilateral netting systems available for commercial use 21 International Tax Environment and Transfer Pricing 506 Fully updated comparative national income tax rate table with updated examples New Finance in Practice box reading on transfer pricing www.downloadslide.com 533 INDEX Big Mac index and, 152–153 currencies (exhibit), 121 daily dollar-euro, 45 (exhibit) effects of changes in, 376–377 equity returns, 343 future expected, estimate, 464 information, interest rate parity and, 145–146 key cross-currency (exhibit), 123 real effective, for selected currencies, 154 (exhibit) trade balance and, 66 Exchange rate determination, purchasing power parity, 172 Exchange rate mechanism (ERM), 41 Exchange rate pass-through, 234, 235 (exhibit) Exchange-rate risk, 360 Exchange rates, forecasting efficient market approach, 159–160 fundamental approach, 160–161 performance, of forecasters, 162–165 technical approach, 161–162 Exchange restrictions, transfer pricing and, 508–509 Exchange risk, 210 Exchange risk hedging, international investment and, 398–399 Exchange risk management, Merck, 238–241 Exchange-traded currency funds, 134–135 Exchange traded funds (ETFs), 10, 385 Exchange-traded futures contracts, 174 Executive responsibility, 102 Exercise price, 181 Ex-Im Bank, 491–492 Expanded opportunity set, Expense indicators, functional currency and, 249 Export creation, 516 Export-Import Bank (Ex-Im bank) of the United States, 491–492 Exports Credits Guarantee Department, 492 Exposure coefficient, 228 Exposure netting, 211 External banking system, 272 F Fabozzi, Frank J., 258 Factor income, 65 Fairfloth, Lauch, 53 Fama, Eugene, 159 Fannie Mae, 290 Far East Index, 340 FASB Financial Accounting Standards Board (FSAB) FDI See Foreign direct investment FDI flows, 405 FDI inflows, 405–406 FDI outflows, 405–406 FDI stocks, 406 Federal Deposit Insurance Corporation (FDIC), 268, 292 Federal Home Loan Mortgage Corporation (Freddie Mac), 290 Federal Housing Finance Agency, 290 Federal National Mortgage Association (Fannie Mae), 290 Federal Open Market Committee, 287 Federal Reserve, 17–18, 30 Federal Reserve Act, 267 Federal Reserve Regulation D, 272 Federal Reserve Regulation K: International Banking Operations, 267 Fed Funds rate, 292 Ferranti Company, 102 Ferrarotti, Franco, Fiat, 91, 291 Fidelity International Small Cap Fund, 390 Fiduciary duty, of managers, 85 Financial Accounting Standards Board (FASB), 246 analysis of change from statement to 52, 258 case application, 251–255 statement 8, 247 statement 52, 247, 249–251 Financial crisis credit crunch to, 289 global, 2008-2009, 16–18 Financial hedging, 237 Financial markets credit crunch and, 291 deregulated, 10 globalization and, 10–11 imperfections in, 6–7 Financial markets, integration of, Financial Policy Committee, 293 Financial Services Act of 2012, 293 Financial services industry, credit crunch and, 290 Financial Services Modernization Act, 286 Financial Stability Oversight Council, 18, 104, 294 Financial Times, 275, 319, 340 Financing indicators, functional currency and, 249 Finland, monetary policy in, 46 Finnerty, Joseph, E., 343 Firms, hedging, 211–213 Fiscal Agents Savings and Investment Centre, 496 Fiscal score, 315 (exhibit) Fisher effects, 156–158 Fitch, 289 Fitch ratings, 311 Fixed-for-fixed rate debt service, 348 Fixed-for-floating currency swap rates, 358 Fixed-for-floating rate, 348 Flexible exchange rate regime, 1973-present, 34–35, 56–59 Flexible optional hedge, 203 Flexible souring policy, 236–237 Flextronics, 21 Floating exchange rate, 40 Floating-for-floating interest rate swap, 358 Floating-rate notes (FRNs), 309 Floor-value, 309 Folks, William, 213, 214 www.downloadslide.com 534 INDEX Fonfeder, Robert, 258 Forecasters, performance of exchange rate, 162–165 Forecasting exchange rates, 158–165 Foreign bonds, 304–307 bearer bonds/registered bonds, 305–306 global bonds, 307 national security regulations, 306 security regulations, easing bond issuance, 306–307 withholding taxes, 306 Foreign branch, 504–506 Foreign branch bank, international banking, 267–268 Foreign Corrupt Practices Act (FCPA), 425 Foreign Credit Restraint Program (FCRP), 33 Foreign currency payables, hedging, 205–207 currency options contracts, 207 forward contracts, 206 money market instruments, 206 Foreign currency translation See Translation entries Foreign direct investment (FDI), 67 average, 407 (exhibit) defined, 404 global trends in, 405–408 political risk and, 418–425 stocks among triad, economies in, 408 (exhibit) Foreign direct investment (FDI), 409–413 cross-border mergers and acquisitions and, 413–418 intangible assets and, 410–411 product life cycle, 412–413 shareholder diversification services, 413 trade barriers, 409 vertical integration and, 411–412 Foreign equity ownership restrictions, 445–446, 450 (exhibit) Foreign exchange (FX) market exchange-traded funds (ETF), 134–135 forward market, 129–134 See also Forward market money, as purchasing power, 112 spot market, 117–128 See also Spot market volumes surge, 177 Foreign exchange (FX) market function/ structure of, 113–117 correspondent banking relationships, 116–117 market participants, 114–116 Foreign exchange markets, Swiss intervention in, 70 Foreign exchange risk, Foreign exchange survey, 2012 (exhibit), 118 Foreign exchange turnover by currency against all other currencies (exhibit), 122 by instrument and counterparty (exhibit), 120 Foreign-owned assets, frequency of expropriations of, 419 (exhibit) Foreign subsidiary, 504–506 Foreign tax credits, 504, 505 Foreign trade transaction, 487–490 Forfaiting, 490 Fortune 100, 484 Fortune 500, 89, 122, 213 Forward contract defining, 174 differences with futures, 175 (exhibit) hedging foreign currency payables and, 206 hedging translation exposure with, 257 long/short positions and, 130 nondeliverable, 130 Forward cross-exchange rates, 130–131 Forward expectations parity (FEP), 158 Forward hedge gains/losses from, 201 (exhibit) option vs., 205 (exhibit) Forward hedge vs unhedged position, 201 (exhibit) Forward market, 129–134 forward cross-exchange rates, 130–131 forward premium, 132 forward rate quotations, 129–130 long/short forward positions, 130 non-deliverable forward contracts, 130 swap transactions, 132–134 Forward market hedge, 200–202 Forward points, 132 Forward premium, 132 Forward rate agreements (FRA), 276–279 Forward rate quotations, 129–130 Fourth methods, pricing, 510 France FDI outflows and, 405 foreign equity ownership restrictions in, 445 French civil law, 92–94 (exhibit) Justinian code, 93 Frankfurt Stock Exchange, 338 Frankle, Alan W., 484 Freddie Mac, 290 Free cash flows, 85 Free floating, exchange rate, 40 Free ride, 445 Free-rider program, 83 French, K., 434 French civil law, 92–94, 96 Frenkle, Jacob, 155 Friedman, E., 100 Friedman, Milton, 49 Full service banks, 265 Full service centers, 266 Full Universal Currency Converter, 138 Fully integrated world capital markets, 444 Functional currency, 249–250 (exhibit) Fundamental approach, rate forecasting, 160–161 Funds mobilization, 481 Fund transfers, unbundling, 512–513 Furness, Chris, 119 Future expected exchange rate, estimating, 464 Futures contracts, 173–176 defined, 130 differences with forward contracts, 175 (exhibit) www.downloadslide.com 535 INDEX Futures market, currency, 176–177 Futures quotations, reading, 179 G Gagnon, Louis, 339 Gains from international diversification, 367 Gande, Amar, 313 Garlicki, T Dessa, 258 General Agreement on Tariffs and Trade (GATT), 14 General Electric Capital Corporation, 309 General Electric (GE), 7, 21, 83, 428, 493 General Motors, 21, 291 General tax rate, 501 Gensaki bonds, 148 German civil law, 92–94, 96 Germany balance on the capital account of, 72–73 (exhibit) corporate boards in, 87 corporate governance and, 100 FDI outflows, 405 G-5 countries, 35 Glaesser, E., 93 Glass-Steagall Act, of 1999, 18, 286 Glaum, Martin, 442 Globa financial crisis, 2008-2009, 16–18 Global Aggregate Index, 319 Global bonds, 307 Global Crossing, scandal, 9, 82 Global Depository Receipts (GDRs), 334, 335 (exhibit) Global financial crisis, 285–287 aftermath of, 293–294 credit crunch, 285–292 See also Credit crunch economic stimulus, 292–293 Global foreign exchange turnover, by country, shares of (exhibit), 113 Global government bonds, mapping yields, 319 (exhibit) Globalization, of world economy, 10–18 euro as global currency, 11–12 Europe, sovereign debt crisis, 2010, 12–13 financial markets, 10–11 global financial crisis, 2008-2009, 16–18 multinational corporations, 18–21 privatization and, 15–16 trade liberalization, economic integration and, 13–15 Globalized integrated world economy, Global Offset and Countertrade Association (GOCA), 492 Global registered shares, 338 Global savings glut, 286 Global shift, Global Stock Markets Factbook (S&P), 340 GLOBEX trading system, 176 Gold bimetallism and, 28 dollar pegged to, 31–32 standard, 1875-1914, 28–30, 31 Golden cross vs death cross, moving average crossover rule (exhibit), 161 Golden West Financial Corp., 290 Gold exchange standard, 32 Gold-exchange system, 32 (exhibit) Goldman Sachs, 238, 239, 290, 323, 359 Gompers, Paul, 104 Good-faith money, 174 Goods, consumption/production of, Google, 83 Gorton, G., 89 Government assistance, trade financing, 490–492 Government Bond Index-Emerging Markets, 319 Grabbe, J., 125 Grace, Peter, 88 Grease payments, 425 Great Depression, 18, 31 Greece currency swap, 359 debt crisis of, 12–13 Greek Drama, 12–13 Greenfield investment, 404, 413 Greenspan, Alan, 75, 292 Greenwich Associates, 115 Gresham’s law, 28 Griffin, John M., 343 Growth option, 469–471 Guggenheim Investments, 134–135 Gupta, Manoj, 343 H Haerter, Holger, 238 Hamburger standard (exhibit), 153 Hammond, Grant T., 492–493, 493 Hanes pantyhose, 323 Harris, Harris, 417 Harris Corporation, 494 Harvard Business Review, 82 Harvey, Campbell, 434 Harvey, Santhi C., 493 Head-and-shoulders pattern reversal signal, 162 (exhibit) Hedge exchange risk exposure, tax savings from, 213 (exhibit) Hedge funds, international diversification with, 386–387 Hedgers, 175 Hedging contingent exposure, 208–209 Hedging through invoice currency, 210 Hedging translation exposure, 256 Heineken, Euromarket, unrated bonds and, 312 Hennart, Jean-Francois, 492, 493, 495 Heston, Steven, 343 Hietala, Pekka, 447 Hillshire Farm meats, 323 Hoffmeister, Ronald, 385 Home bias, 367, 434–435, 436 (exhibit) in portfolio holdings, 387–388 www.downloadslide.com 536 INDEX Honda, 6, 404 Hong Kong Stock Exchange, 16 Hooft Graafland, Rene, 312 Hostile takeovers, 92 Hot money, flow of, 54 Hotspot foreign exchange, 114–115 Housing, credit crunch and, 290–291 H-shares, 91 Huang, Victor, 91, 127, 389 Hutchinson Whampoa, chain of control, 97 (exhibit) Hymer, Stephen, 409 Hyperinflation, interwar period, 30 I IBM, 83 ICAP, FX market, 113, 114–115, 118 Idiosyncratic risks, 383 Imperfect labor market, FDI and, 409–410 Implicit cost of capital (ICOC), 435 Import duties, 510–513 Incentive contracts, 87 Income tax, 499–501 Incompatible trinity, 54 Increasing sum, 14 Incremental cash flow, 458–459 India cost of capital in, 434 economic reforms in, 14–15 economy of, 157 (exhibit) Enron Development Corporation and, 427–429 Enron in, 420 foreign equity ownership restrictions in, 445 Indicative rating level, 315 (exhibit) Indirect covariance, 444 Indirect foreign tax credits, 504 Indirect quotations, 120 Indirect tax, 501 Indirect world systematic risk, 444 Industrial structure, equity returns, 343 Inflationary economics, FSAB 52, 251 Information asymmetry, 212 Information technologies, 10–11 Initial performance bond, 174, 193 Input/output, with/without trade, 25–26 (exhibits) Instruments, types of bonds, 307–310 dual-currency bonds, 309–310 equity-related bonds, 309 euro-medium-term notes (Euro-MTNs), 308 floating-rate notes, 309 straight fixed-rate issues, 308 Intangible assets, FDI and, 410–411, 416 Interbank bid rate, 272 Interbank market, 114 Interbank offered rate, 272 Interbank trading rooms, 125 Intercompany transactions, arrangement indicators, 250 Intercontinental Exchange (ICE), 176 Intercountry correlation, 368 Interest Equalization Tax (IET), 33 Interest payments, tax savings from, 460 Interest rate, variations of basic, currency swaps and, 358 “Interest Rate and Currency Swap Agreement”, 360 Interest rate parity (IRP), 140–149 covered interest arbitrage (CIA), 142–145 currency carry trade, 146–147 deviations from, reasons for, 147–149 diagram, 144 (exhibit) exchange rate information, 145–146 transaction costs (exhibit), 148 Interest-rate-risk, 358–360 Interest rate swap financing pricing basic, 353 swap bank, 350 swap market, size of, 349 swap market quotations, 350 types of swaps, 348 Interest rate swaps, 350–353 Internal control assessment, 102 Internalization theory, 411 Internalizing transactions, 411 International Accounting Standards (IAS), 251–255 International Accounting Standards Board (IASB), 251 International Account Standards committee (IASC), 251 International Asset Pricing Model (IAPM), 443–445, 445 International bank external liabilities, 273 (exhibit) International Bank for Reconstruction and Development (IBRD), 31 International banking reasons for, 266 services, 264–266, 270 (exhibit) International Banking Act of 1978 (IBA), 268 International Banking Facility (IBF), 269 International banking offices, types of, 266–269 correspondent bank, 267 Edge Act banks, 268 foreign branches, 267–268 offshore banking center, 268–269 representative offices, 267 subsidiary and affiliate banks, 268 International banks, 116 International bond amounts outstanding classified by major instruments, 306 (exhibit) classified by nationality, issuer type, 311 (exhibit) International bond and debt product underwriters, ranking, 316–317 (exhibit) International bond investment, 378–379 International bond market credit ratings, 311–313 currency distribution, nationality, type of issuer, 310–311 eurobond market structure, practices and, 313–318 See also Eurobond market structure, practices and foreign bonds, Eurobonds, 304–307 indexes, 319–320 www.downloadslide.com INDEX instrument characteristics (exhibit), 310 types of instruments, 307–310 world’s bond markets, statistics, 304 International Business Machines, 88 International Capital Market Association (ICMA), 318 International capital market equilibrium, cross-listing effects, 456 (exhibit) International correlational structure, risk diversification and, 367–369 International correlation structure, 367 International country funds, diversification and, 381–384 International debt crisis, 281–284 debt-for-equity swaps, 283–284 history, 282–283 International diversification with American depository receipts (ADRs), 384–385 exchange traded funds (ETFs) and, 385 hedge funds and, 386–387 small-cap stocks, 388–389 International and domestic bonds outstanding, 305 (exhibit) International equity markets benchmarks, 340–341 characteristics of, 331 factors affecting returns, 342–344 iShares MSCI, 341–342 market capitalization, of developed countries, 324–325 (exhibit) market capitalization, of developing countries, 325–326, 328 (exhibit) market structure, trading practices, costs and, 329–332 statistical perspective, 324–329 International equity markets, trading in, 332–340 American depository receipts (ADRs), 334–340 cross-listing of shares, 332–334 empirical findings on cross-listing and ADRs, 338–340 global registered shares, 338 Yankee stock offerings, 334 International finance Armed Forces, countertrade list, 494 boards of directors, family and, 88 dimensions of, 5–8 dollar and deficit, 74–75 electronic brokering, 114–115 foreign interest, South Africa, 342 FX market volumes surge, 177 Greece’s currency swap fallout, 359 Heineken, Euromarket, unrated bonds and, 312 Islamic forfaiting, 491 linear sequence, in manufacturing, Singer & Company, 412 management, 8–10 McCurrencies, 152–153 money talks, 118–119 multinationals, as efficient, 19 Mundell, Nobel price in economics, 48–49 offshore financing, 507 Porsche powers profit with currency plays, 238–239 rotten heart of, 276 537 SOX and bonds, 308 Starbucks, 514 transfer pricing, as international tax issue, 511 World Bank, currency swap, 349 International Fisher effect (IFE), 158 International gold standard, 29 International government bond market data, 320 (exhibit) International investment, exchange risk hedging and, 398–399 Internationally nontradeable assets, 443–445 International Monetary Fund (IMF), 13, 268 Bretton Woods system and, 31 International monetary system Argentine peso crisis, 55–56 Asian currency crisis, 51–55 bimetallism, before 1875, 28 Bretton Woods system, 1945-1972, 31–34 euro and European monetary union, 43–47 Eurpopean monetary system, 40–42 evolution of, 27–28 exchange rate arrangements, 36–40 flexible exchange rate, 34–35, 56–59 gold standard and, 28–30, 31 interwar period, 1915-1944, 30–31 Mexican Peso crisis, 49–50 monetary union, benefits of, 44–46 International money market BBA LIBOR, 274 eurocommercial paper, 279 eurocredits, 274–275 Eurocurrency market, 272–274 eurodollar interest rate, futures contract, 279–281 euronotes, 279 forward rate agreements, 276–279 International mutual funds, 379–381 International portfolio investments, 67 International portfolio selection, optimal, 369–376 International rate of return (IRR), 432 International security returns, decomposition of, 377 (exhibit) International Swaps and Derivatives Association (ISDA), 349, 360 International tradable assets, 443–445 Internet, information technologies and, 10–11 See also Website(s) Intervention, 116 Interwar period, 1915-1944, international monetary system, 30–31 In-the-money, 182, 193 Intracountry correlation, 368 Intrinsic value, 185 Investment Company Act, 386 Investment grade ratings, 311 Investor protection, 90, 92 law and, 95–100 Invisible hands, 17–18 Invisible trade, 65 Invoice currency, hedging through, 210 Ioannidis, Christos, 339 www.downloadslide.com 538 INDEX IRR See International rate of return (IRR) iShares MSCI, 341–342 iShares MSCI South Africa Index (iShares SA), 342 Ishii, Joy, 104 Italy bonds issues, 307 does law matter?, 95 (exhibit) stocks in, 91 Ito, Takatoshi, 128 J Jaguar Fund, 386 Jamaica Agreement, 34–35 Janakiranmanan, S., 445, 448 Jang, Hasung, 101 Japan capital account balance, 72–73 (exhibit) capital flows and, 148 corporate governance and, 100 cost of capital in, 434 foreign currency reserves and, 286 Foreign Exchange and Foreign Trade Control Law, 149 foreign exchange market and, 10 interest rate parity, deviation from (exhibit), 149 keitretsu in, 87 Jayaraman, Narayanan, 339 J-curve effect, 66 Jeffery, Jack, 115 Jensen, M., 83, 85, 87, 418 Jesswein, Kurt, 213, 214 Jobs, Steve, 85, 88 Johannesburg Securities Exchange (JSE), 342 Johnson, S., 100 Jong-Hyun, Choi, 101 Joshi, Manohar, 429 J.P Morgan Chase, 290 J.P Morgan & Co., 385 J.P Morgan Government Bond Index, 319–320 Justinian code, 93 K Kamath, Shyan, J., 266 Kang, J., 89 Kao, G., 339 Karolyi, A., 91, 339, 343, 441, 443 Keasey, K., 89 Keiretsu, 8, 87, 97 Kennedy, John F., 33 Keynes, John Maynard, 31, 141 Khandwala, Amit, 385 Khodorkovsky, Mikhail, Khorana, A E., 386 Kim, Yong Cheol, 313 Kindleberger, Charles, 409 Kohl, Helmut, 46 Kolodny, R., 417, 418 Korea foreign equity ownership restrictions in, 445 Peoples Solidarity for Participatory Democracy, 101 Koskinen, Yrjö, 45 Kravis, I., 155 Kwok, Chuck, 213, 214 L Labor costs, around globe, 410 (exhibit) Laffer, Arthur, 49 Lag, lead, hedging via, 210–211 Lai, S., 104, 389 Lang, Mark, 441 La Porta, R., 84, 92, 99 Large-cap bias, 388–389 Lau, Sie, 434, 435, 436 Law classification of countries, by legal origin, 94 (exhibit) corporate governance and, 92–94 See also Civil law Law, consequences of, 95–100 capital markets, valuation and, 99–100 ownership and control pattern, 95–99 private benefits of control, 99 Law of one price, 140, 141 Lead and lag, hedging via, 210–211 Lead/lag strategy, 211 Lead manager, 313 Lee Keun-Hee, 97 Legal origins, 92 Legal tender, no separate, 36 Lehman, Bruce, 155 Lehman Brothers, 16, 290 Lessard, Donald, 461, 463 Less-developed countries (LDCs), 282 Letter of credit (L/C), 489 Levich, Richard, 162–163 Levitt, Arthur, 101 LIBOR, 273, 276–277, 350 Limit order, 330 Limit order book, 330 Linck, J., 102 Linear sequence, in manufacturing, 412 Lins, Karl, 441 Lipsey, R., 155 Liquidity, measures of, 326–328 Lisbon Stock Exchange, 331 Lobo, G., 102 Local currency and foreign currency ratings, 314–315 (exhibit) Local currency optimal international portfolio companies, 374 Location decision, Sigma Corp’s, 518 London Interbank Offered Rate (LIBOR), 273, 276–277 London Stock Exchange (LSE), 10, 102, 103, 342, 440–441 Long forward positions, 130 Long position, 174 www.downloadslide.com 539 INDEX Long Term Capital Management (LTCM), 386 Long-term issuer credit rating definitions, 314 (exhibit) Long-term moving average (LMA), 161 Lopez-de-Silanes, F., 84, 92, 99 Lost sales, 462 Louvre Accord, 35 Low interest rate environment, 286–287 Low vs high transfer pricing, 507–508 Lufthansa airlines, 211 Luxembourg Stock Exchange, 332 Lynche’s CashPro Accelerate, 485 Lyons, Richard K., 127–128 M Maastricht Treaty, 41–42 Macroeconomic factors, equity returns, 343 Macro risk, 418 Madrid Stock Exchange, 331 Magee, Stephen, 411 Magna Carta, 93 Maharashtra, state government, India, 427–429 Maintenance performance bond, 174 Managed-float system, 35 Managerial entrenchment, 85 Managerial ownership, 89–90 Managing group, 313 Mandler, Udo, 442 Mannesmann Company, Germany, 8–9 Mao Ze-dong, 419 Margin, 174 Mark, Rebecca P., 427–429 Market, diversification of, operating exposure, 237 Marketability, 329 Market capitalization developed countries, 324–325 (exhibit) developing countries, 325–326 (exhibit) liquidity, measures of, 326–328 measures of market concentration, 328–329 Market-centered governance, 100 Market completeness, 360 Market concentration, measures of, 328–329 Market consolidations, mergers and, 331–332 Market imperfections, 6, 409 Market makers, 318 Market order, 329–330 Market portfolio, 433 Market price, 330 Markets, capital in segmented vs integrated, 432–434 Market structure, trading practices, costs and, 329–332 Market-to-market, 174 Markup policy, 507–508, 508–509 Masulis, Ronald W., 127 Matsumerda, 218–224 Maturity date, 174 Maxwell Group, 102 May, Richard, 218–224 May Day, 10 MBS See Mortgage-backed securities McConnell, John, 87, 103 McDonald’s, 152–155 McKinnon, Ronald, 75 Measure of aggregate risk aversion, 443 Meckling, W., 83 Meese, Richard, 160–161 Melvin, Michael T., 128 Mercantilism, 74 Mercantilists, 14 Merchandise trade, 65 Merck, exchange risk management at, 238–241 Merger and acquisition (M & A), 15 See also Cross-border mergers and acquisitions Mergers, market consolidations and, 331–332 Meriwether, John, 386 Merrill Lynch, 68, 290 Merton, Robert, 386 Metrick, Andrew, 104 Mexican Derivatives Exchange, 176 Mexican peso crisis, 49–50 Mexico balance of payment problems and, 80 Centralia Corporation in, 251–255 foreign equity ownership restrictions in, 445 lenders to, biggest, 282 Micro risk, 418 Microsott, 21 MicroWarehouse, 88 Miller, Darius P., 307, 441, 443 Miller, Merton, 459, 460 Mills, William, 82 Mini Case(s) Airbus’ dollar exposure, 218 American Machine Tools, Inc., 497 Centralia Corporation, currency swap, 365 Detroit Motor’s Latin American Expansion, 299 Dorchester, Ltd., 473–474 Eastern Trading Company, new MBA, 486 Eastern Trading Company, transfer pricing, 519 economic exposure, Albion Computers PLC, 243 efficient funds flow, Eastern Trading Company, 486 Enron vs Bombay politicians, 427–429 Mexico’s balance-of-payments problem, 80 Nike and Sweatshop Labor, 23–24 optimal international portfolio, 396 options speculator, 195 Parmalat, Europe’s Enron, 106–107 San Pico’s new stock exchange, 346 Sara Lee Corporation, Eurobonds and, 323 Shrewsbury Herbal Products, Ltd., 138 Sigma Corp’s location decision, 518 Strik-it-Rich Gold Mining Company, 474 Sundance Sporting Goods, Inc., 260–261 Turkish lira, purchasing power parity and, 170–171 United Kingdom, euro and, 60 www.downloadslide.com 540 INDEX Minority foreign subsidiary, 504–506 Mintel products, pricing strategy, 507–515 Mislocated funds, 481 Mismatch risk, 360 Mittoo, Usha, 434 MNCs See Multinational corporations Mobaus, Henry, 170–171 Model economy, 449 (exhibit) Modigliani, Franco, 459, 460 Mohamad, Mahatir, 386 Monetary approach, 172 Monetary/nonmonetary method, translation, 246 Monetary policy, 17 Monetary score, 315 (exhibit) Monetary union benefits of, 44–46 costs of, 46–47 Money magazine, 122 Money market hedge, 202–203 Money market instruments, 206 Money Market Investor Funding Facility, 292 Money talks, 118–119 Monnet, Jean, 46 Monte Carlo simulation, 469 Moody’s, 289 Moody’s Investors Service, 311, 323 Moore Global Fund, 386 Morck, R., 89, 417 Morgan Stanley, 290, 421 Mortgage-backed securities (MBSs), 17, 287–288 Mortgage interest rates, 286–287 Moving average crossover rule, 161 Multilateral netting system, 478–479, 479 (exhibit), 480 (exhibit) Multinational corporations (MNCs), defined, 19 as efficient, 19 global economy and, 18–21 top nonfinancial, by foreign assets (exhibit), 20 Mundell, Robert, 11, 46–49 Murphy, K., 87 Mutual funds See International mutual funds, 379–381 N NAFTA See North American Free Trade Agreement (NAFTA), 15 National Association of Security Dealers Automated Quotation System (NASDAQ), 330 Nasser, Gamla, 419 National Bureau of Economic Research, 285 National income accounting, balance of payments and, 81 Nationality, bond issuers and (exhibit), 311 National neutrality, 499 National security regulations, bonds markets and, 306 Nearby, 178 Negotiable certificates of deposit (NCDs), 273 Nelling, E., 386 Nelson, John, 119 Nenova, T., 99 Nestlé Company, 6–7, 21, 67, 446–447 Net asset value (NAV), 135 Net present values (NPVs), 85, 458–459 Netter, J., 102 Netting center manager, 479–480 Netting systems, 477–479 New York Stock Exchange (NYSE), 16, 91, 330, 440–441 New Zealand, privatization in, 16 Ng, Lillian, 434 Nguyen, Nhut, H., 339 Nike, sweatshops and, 23–24 Nilsson, Mattias, 45 Nissan, 236 Nixon, Richard, 33 Nonbank dealers, 116 Non-deliverable forward contracts, 130 Nondiversifiable risk, 368 Nongovernmental organizations (NGOs), 101 Nontradable assets, pricing of, numerical situations, 456 Nontradables, 155 Nordic Countries Index, 340 Norex, 331–332 North American Free Trade Agreement (NAFTA), 15 North American Index, 340 Northern Rock, 290 Notional principal, 349 Notional value, 288 Noviello, Joe, 119 Novo Industri, 436–438 Numa Directory, 176 O Obama, Barack, 293 OECD See Organisation for Economic Co-operation and Development Offer, 123 Offer price, 123 Officer, Dennis, 385 Official broker, 330 Official reserve assets, 69–71 Official settlement balance, 68 Offset transaction, 493 Offshore banking center, 268–269 Offshore financing, 507 Old Mutual, 342 OMX exchange, 331–332 O’Neill, Paul, 74 Open interest, 178 Openness perspective, long-term (exhibit), 13 Operating exposure defining, 230–231 determinants of, 233–235 www.downloadslide.com INDEX diversification of market, 237 financial hedging, 237 flexible souring policy, 236–237 illustration of, 231–233 low-cost production sites, selecting, 236 research and development, product differentiation, 237 translation exposure, vs., 258 Operational hedging, 237 Operational risk, 271, 418, 419 Operational techniques, 199 Operations, projected (exhibits), 231–233 Optimal international portfolios, 369–376 Optimal portfolio, solving for, 400–401 Optimum currency areas, 46 Option, 181 Options contracts, 181 Options hedge, dollar proceeds from, 204 (exhibit) Options market hedge, 203–205 Options speculator, 195 Option vs forward hedge (exhibit), 207 Oracle, 88 Organisation for Economic Co-operation and Development (OECD), 19 Organizational structures, branch and subsidiary income, 504–506 Organization for Economic Cooperation and Development Model Tax Convention, 510 Organization of Petroleum Exporting Countries (OPEC), 282, 286 Osborne, George, 514 Oslo Commerce Bank, 218 Otani, Ichiro, 148 Other investment, 68 Out-of-the-money, 182, 193 Outright forward transaction, 132 Outsource, 21 Overall balance, of payments, 68 Overall limitation, tax credits and, 504 Overseas Private Investment Corporation (OPIC), 423 Overseas stock listings, 90–91 Over-the-counter (OTC) markets, 113, 330 Ownership, capital markets, consequences of law, 96 (exhibit) Ownership, control pattern, law and, 95–99 Oxley, Michael, 308 P Paris Bourse, 331 Parity interest rate, 140–149 purchasing power, 149–156 Parmalat company, scandal, 9, 82, 89, 100, 106–107 Parsley, David C., 313 Partially integrated world financial markets, 444 Par value, 31–32 Passive income, 501 541 Pattern, head-and-shoulders, reversal signal, 162 (exhibit) Paulson, Henry, 292 Pegged exchange rate within horizontal bands, 40 People’s Bank of China, 286, 292 People’s Solidarity for Participatory Democracy (PSPD), 101 Peters, Elton, 138 Petrodollar recycling, 282 Petrucci, Pandolfo, 49 Pfizer, 21 Philadelphia Stock Exchange (PHLX), 181–183 Philippines, armed forces of, countertrade and, 494 Phylaktis, Kate, 344 Plaza Accord, 35 Polfliet, R., 313 Political dynamics, corporate governance reform and, 101 Political risk defined, foreign equity ownership restrictions and, 451 Political risk, foreign direct investment (FDI) and, 418–425 Political risk analysis Turkey, 423 (exhibit) Vietnam, 422 (exhibit) Porsche, profit currency plays and, 238–239 Portfolio investment, 67 Portfolio risk diversification, 367 Positive net present value (NPV), 442 Poterba, J., 434 Precautionary cash balances, reduction in, 483–484 Premium, 181 Present value, calculating, 466–467 (exhibits) Price convergence, 180 Price discovery, 179 Prices, world, guide to, 155 (exhibit) Price-specie-flow mechanism, 30 Price spread, between bearer and registered shares, Nestle Corporation, 447 (exhibit) Price stability, 43 PriceWaterhouseCooper, 500 (exhibit) Pricing relationship, European option, 187–189 Pricing spillover effect, 444, 445 Pricing-to-market (PTM), 446 Primary market equity, 329 Eurobond, 313–318 Principles of Political Economy (Ricardo), 14 Private benefits of control, 99 Privatization, 15–16, 419 Procter & Gamble, 21 Production goods and services, low-cost sites for, selecting, 236 Product life cycle exhibit, 414 FDI and, 412–413 theory, 413 Progressive corporate taxes, 212 www.downloadslide.com 542 INDEX Promissory notes, 490 Prudential Regulation Authority, 293 Public corporations, governance of, 83–84 Public good property, 411 Purchasing power parity (PPP), 149–156 in capital budgeting, 469 deviations, real exchange rate and, 151 evidence on, 151–156 exchange rate determination, 172 international, among exchange, interest, and inflation rates, 158 (exhibit) Pure domestic systematic risk, 444 Pure foreign market risk, 448 Put, 181 Puthenpurackal, John J., 307 Pyramidal ownership, 97 Q Qatar, Doha Round in, 14 Qualified institutional buyers (QUIBs), 307, 308 Quality spread differential (QSD), 351 Quantitative easing, 292 Quantity theory of money, 172 R Raab, Michael, 238 Random walk hypothesis, 159 Rao, Narasimha, 428 Ravenscraft, David, 417 Reagan, Ronald, 49 Real exchange rates, 151 Real options, in capital budgeting, 469–471 Recurrent exposure, hedging with swap contracts, 209–210 Reference entity, 288 Reform, corporate governance See Corporate governance reform Registered bonds, 305–306 Regression coefficient, 228 Regression parameters, computations of, 229 (exhibit) Reinvoice center, 211 Relative efficiency, 26 Remeasurement, 250 Renminbi (RMB), 54 Reporting currency, 250 Representative offices, international banking, 267 Resale price approach, 510 Residential method, of declaring national tax jurisdiction, 503 Residential taxation, 503 Residual control right, 85 Resnick, Bruce G., 307, 343 Resolution authority, 104 Restricted funds, 462 Retail market, 114 Reuters, 63 Reversal signal, head-and-shoulders pattern, 162 (exhibit) Reversing trade, 175 Ricardo, David, 14, 25, 150 Richardson, J., 151–152 Rio Tinto, 411 Risk, interest rate, 360 Risk-adjusted discovery method, 468 Risk adjustment, in capital budgeting analysis, 468 Risk-aversion measure, 443 Risk diversification, international correlation structure and, 367–369 Risk management products, use of, 213–214 Risk publication, 164 Risk reduction, domestic vs international diversification (exhibit), 369 Risk-return, large vs small-cap funds, 390 Risk-weighted assets, 270 Robert Bosch, 99 Robertson, Julian, 386 Robson, Mark, 119 Rogoff, Kenneth, 160–161 Roll, Richard, 343 Roman Empire, 93 Round-trip transactions, 176 Rouwenhorst, K., 343 Roux, Andre, 342 Royal Dutch Shell, 411–412 Rugman, Alan M., 266 Rule 415, SEC, 306–307 Rule 144A, SEC, 307 S Sabherwal, 164 Sales market indicators, functional currency and, 249 Sales price indicators, functional currency and, 249 Salomon Brothers, 386 Samsung Electronics, 83, 97 Samuelson, Paul, 49 Samurai bonds, 305 San Pico Stock Exchange, 346 Sara Lee Corporation, Eurobonds and, 323 Sarbanes, Paul, 308 Sarbanes-Oxley Act, 101–102, 308 Sarkissian, Sergei, 438 Scandanavian law, 94 (exhibit), 96 Schaffer, Matt, 493 Scheraga, C., 417, 418 Schill, Michael, 438 Schmid, F A., 89 Scholes, Myron, 386 Schuman, Robert, 46 Schumpeter, 100 Sears, Rick, 115 Secondary market equity, 329 eurobond, 318 www.downloadslide.com INDEX Securities and Exchange Commission (SEC), 17–18, 91, 102, 306 Security regulations, bond issuance and, 306–307 Selling group, 313 Sensitivity analysis, capital budgeting, 469 Services, 4, 65 Settled-up, 174 Settlement price, 174 Shadow banking system, 286 Shandong Iron & Steel Group, 411 Shanghai Stock Exchange, 16 Shapiro, A., 449 Share exchange risk, 210 Shareholder diversification services, FDI and, 413 Shareholder rights, 82 Shareholder wealth maximization, Share valuation, 329 Sharpe performance measure (SHP), 371, 380, 389 Shastri, Kuldeep, 192, 339 Shelf registration, 306–307 Shenzhen Stock Exchange, 16 Shift exchange risk, 210 Shivdasani, A., 89 Shleifer, A., 84, 89, 92, 93, 99 Short, H., 89 Short forward positions, 130 Short position, 174 Short-term moving average (SMA), 161 Shrewsbury Herbal Products, Ltd (mini case), 138 SIBOR, 273 Siemens, 21 Sigma Corp, 518 Silver, bimetallism and, 28 Simon, David, 343 Singapore Depository Receipts, 334 Singapore Interbank Offered Rate (SIBOR), 273 Singapore International Monetary Exchange, 173 Singapore Stock Exchange, 332 Singer, I M., 412 Singer & Company, 412 Single-currency interest rate swap, 348 SK Telecom, 101 Small figure, 124–125 Smith, Adam, 83 Smith, Jeffery, 323 Smithsonian Agreement, 34, 40 Snake, 41 Société Générale, 173 Society for Worldwide Interbank Financial Telecommunications (SWIFT), 117 Solnik, Bruno, 343, 368 Sony, 21 Soros, George, 386 Source country, 504 Source method, of declaring tax jurisdiction, 503–504 Source taxation, 503 543 Sourcing policy, flexible, 236–237 South Africa cost of capital in, 434 foreign interest in, 342 Sovereign debt crisis, 291 Sovereign rating framework, 315 (exhibit) Sovereign risk, 360 Sovereign wealth funds (SWFs), 68 Spaak, Paul-Henri, 46 Special drawing rights (SDRs), 32–33 (exhibit) Specialist, 330 Speculative transactions, 116 Speculators, 175, 195 Spot foreign exchange market microstructure, 127–129 Spot FX trading, 124–125 Spot market, 117–129 bid-ask spread, 123–124 cross-exchange rate, alternate expressions for, 123 cross-exchange rate quotations, 122–123 cross-rate trading desk, 125–127 FX trading, 124–125 spot foreign exchange market microstructure, 127–129 spot rate, 117 triangular arbitrage, 127 Spot rate, 117–118 Spread, 288 Stabilized arrangement, 36 Standard Chartered, 115, 118 Standard consumption basket, 149 Standardized features, futures contract, 130 Standard & Poor’s 500, 291 Standard & Poor’s and Moody’s, 12, 289 Standard & Poor’s Emerging Markets Data Base, 325 Standard & Poor’s (S&P), 311, 312, 323 issuer credit rating, 314–315 (exhibit) rating framework, 315 (exhibit) Starbucks, 514 Statistical discrepancy, balance of payments and, 68–69 Stella Automobile, 99 Sterilization of gold, 30 Stitzel, Thomas, 451 Stock exchanges, total domestic, foreign company listings on major, 333 (exhibit) Stock market indexes, major national, 341 Stock markets, emerging, 91 Stock returns, correlations among international, 368 Stocks country-to-country frequency distribution of foreign listings, 439 (exhibit) cross-border listing of, 438–443 Stonehill, Arthur, 436, 451 Straight fixed-rate bond, 308 Striking price, 181 Strik-it-Rich Gold Mining Company, 474 Structured investment vehicles (SIVs), 287, 288 Stulz, R., 91, 313, 339, 434, 441 www.downloadslide.com 544 INDEX Subpart F income, 506 Subprime mortgage crisis, in United States, 16–18, 103 Subsidiaries, financial structure of, 449–451 Subsidiary bank, 268 Substitution portfolio, 448 Sundance Sporting Goods, Inc., 260–261 Suspension option, 469–471 Swap See Currency swap Swap bank, 350 Swap broker, 350 Swap contracts, hedging recurrent exposure with, 209–210 Swap dealer, 350 Swap market, size of, 349 Swap market quotations, 350 Swap transactions, 132–134 Sweden, foreign equity ownership restrictions in, 445 Swiss intervention, in foreign exchange markets, 70 (exhibit) Swiss National Bank (SNB), 69 Switch trade, 493 Switzerland foreign equity ownership restrictions in, 445 official reserve assets and, 69 Syndicate, 275 Synergistic gains, 416 Systemic risk, 18, 104, 368, 433 T Tandon, Kishore, 192, 339 Tanzi, Calisto, 106–107 Tavlos, Nicholas, 417 Taxation objectives of, 498–499 transfer pricing and, 506–515 Taxation, types of income tax, 499–501 value-added tax (VAT), 501–502 withholding tax, 501 Tax environments, national foreign tax credits, 504 territorial taxation, 503–504 worldwide taxation, 503 Tax equity, 499 Tax haven country, 505–506 Tax Increase Prevention and Reconciliation Act (TIPRA), 506 Tax neutrality, 498–499 Tax rates, from certain countries, 500 (exhibit) Tax Reform Act of 1986, 506 Tax treaties, 501 Technical analysis, 162 Technical approach, to rate forecasting, 161–162 TED spread, 289 Teltrex’s cash management system, 476–481 Temasek Holdings, 68 Templeton Global Smaller Companies Fund, 390 Temporal method, transaction, 246 Territorial method, declaring tax jurisdiction, 503–504 Territorial taxation, 503–504 Thailand, foreign equity ownership restrictions in, 445 Theory of comparative advantage, 14 “Theory of the Firm: Managerial Behavior, Agency Costs, and Ownership Structure (Jensen & Meckling), 83 Thomson Corporation, 63 Thomson Reuters, 113–115, 118 Thornton, Grant, 107 TIBOR, 273 Tier I Core capital, 270, 289 Tier III capital, 270–271 Tier II Supplemental capital, 270 Time draft, 489 Time value, 187 Timing option, 469–471 Tiwari, Siddharth, 148 Tobin tax, 54 Tokyo Interbank Offered Rate (TIBOR), 273 Tokyo Stock Exchange, 10 Toronto Stock Exchange (TME), 330 Total official resources, composition of, 70 (exhibit) Toyota, 21, 83, 86 Trade, theory of comparative advantage and, 25–26 Trade balance, 65 Trade barriers, FDI and, 409 Trade deficits, 76–77 Trade finance countertrade, 492–495 foreign trade transaction, 487–490 forfaiting, 490 government assistance, in exporting, 490–492 Trade imbalance, 65 Trade liberalization, economic integration and, 13–15 Transactional restrictions, 306 Transaction balances, 476 Transaction domain, 11 Transaction exposure cross-hedging minor currency exposure, 208 defined, 198 determinants of operating, 233–235 exposure netting, 211 firms, hedging and, 211–213 forward market hedge, 200–202 hedging contingent exposure, 208–209 hedging foreign currency payables, 205–207 hedging recurrent exposure, with swap contracts, 209–210 hedging through invoice currency, 210 hedging via lead and lag, 210–211 illustration, of operating, 231–233 managing operating exposure, 236–237 money market hedge, 202–203 operating exposure, 230–231 options market hedge, 203–205 risk management products, use of, 213–214 www.downloadslide.com 545 INDEX Transfer pricing, 85 advance pricing agreement, 515 blocked funds, 515–516 differential income tax rates and, 509 exchange restrictions, 508–509 import duties, 510–512 as international tax issue, 511 low vs high markup policy, 507–508 taxation and, 506–515 unbundling fund transfers, 512–513 Transfer risk, 418 Translation exposure balance sheet hedge, 256 defined, 198, 245 derivatives hedge, 257–258 hedging, 256 hedging with forward contract, 257 management of, 255–258 operating exposure, vs., 258 report, 253 transaction exposure vs., 255–256 Translation methods, 245–247 comparison, 247 comparison effects of, on financial statement preparation, 248 (exhibits) current/noncurrent, 245–246 current rate, 246 monetary/nonmonetary, 246 temporal, 246 Translation process, FASB 52, mechanics, 250 Transparency International, 421, 424 (exhibit) Travlos, Nickolaos, 87, 103 Treasury Management International, 481 Trenner, Justyn, 114–115, 119 Trester, J., 386 Triangular arbitrage, 127, 128 (exhibit) Trichet, Jean-Claude, 13 Triffin, Robert, 32 Triffin paradox, 32 Trilemma, exchange rate and, 54 Troubled Asset Relief Program (TARP), 18, 292 Tuffey, Chris, 312 Turkey lira, purchasing power, 170–171 political risk analysis, 423 (exhibit) Turner, Robert D M., 511 Turnover ratio, of equity markets in developed/developing countries, 327–328 (exhibit) U Unbundling fund transfers, 512–513 Uncontrolled foreign corporation, 504–506 Uncovered interest rate parity, 146 Underwriters, 313 Underwriting spread, 313 Underwriting syndicate, 313 Unemployment, credit rate and, 290–291 Unemployment rate, United States, DJIA and, 17 (exhibit) Unilateral APA, 515 Unilateral transfers, 65 Unilever NV, 323 Unique risks, 383 United Auto Workers (UAW), 404 United Kingdom capital account balance, 72–73 (exhibit) cost of capital in, 434 does law matter?, 95 (exhibit) English common law, colonies and, 92–94 United Nations Conference on Trade and Development (UNCTAD), 19–20 United States balance of payments summary, 2011 (exhibit), 64 balance on the capital account of, 72–73 (exhibit) cost of capital in, 434 credit crunch in, 285–287 investment in foreign equities, 367 subprime mortgage crisis in, 16–18 tax credits, calculating foreign, 505 (exhibit) tax treaty, with selected countries, 502 (exhibit) trading partners, top, 77 (exhibit) unemployment rate, DJIA and, 17 (exhibit) Universal banks, 265 U.S Department of Commerce, 11, 492 U.S Department of Labor, 291 U.S Generally Accepted Accounting Rules (US-GAAP), 442 U.S Internal Revenue Code, 510 U.S Securities Exchange Act of 1934, 306, 338 U.S Securities Exchange Commission (SEC), 442 U.S Treasury, 290 U.S Treasury Securities, 289 V Valuation, capital markets, law and, 99–100 Value-added tax (VAT), 501–502, 503 (exhibit) Value-additivity, 461 VanderGriend, Mark, Van Kirk, Hilary, 507–515 Veritas Emerging Market Fund, 170–171 Vernon, Raymond, 412–413 Vertical integration, FDI and, 411–412 Vietnam, political risk indicator, 422 (exhibit) Vishny, R, 84, 89, 92, 99 Volatile short-term behavior, 146 Volcker, Paul, 49, 294 Volker Rule, 294 Volker rule, 103 Volvo, 237 Vu, Joseph, 339 www.downloadslide.com 546 INDEX W Wachovia, 290 Wahab, Mahmood, 385 Wall Street Journal, The, 7, 101, 319, 342, 503 Wallstreet Treasura, 484 Walmart Stores Inc., 21, 323 Wanniski, Jude, 49 Warms, Mark, 114–115 Warrant, 309 Washington Mutual, 290 Wealth of Nations (Smith), 83 Website(s), 15 http:data.un.org, 171 http://eceiropaeu/taxaion-customs/taxation/vat, 501 http://federalreserve.gov/releases/h10/hist, 60 http:fx.sauder.ubc.ca, 170 http://leadership.wharton upenn.edu/governance/index.shtml, 101 http://mney.cnn.com/data/currencies, 122 http:reports.duni.com/en/corporate/investors/reports/2011, 246 http://thomsonreuters.com, 113 http://tpmba.com, 518 http://transparency.org, 421 http://unctadstat.unctad.org, 404 http://us.ishares.com/product_info/fundovervoew/EWW.htm, 395 http://www.federalreserve.gov/releases/h10/hist/, 34 World Fact Book, 427 www,columbia.edu/edu/ram15, 46 www,fitchratings.com, 311 www.adb.org, 53 www.adr.com, 345, 385 www.afme.eu, 322 www.bankofamerica.com/business/ci/products, 299 www.bba.org.uk, 273 www.bea.gov, 65 www.bgcpartners.com, 116 www.bis.org, 112, 270, 350 www.bloomberg.com, 345 www.bloomberg.com/news/bonds, 299 www.bnymellon.com/depositoryreceipts/index.htm, 438 www.chips.org, 117 www.clearstream.com, 318 www.cls-group.com, 117 www.cmegroup.com, 176, 195 www.currenex.com, 116 www.ecb.int, 43 www.ecb.int/stats, 75 www.ecgd.gov.uk, 492 www.ecgi.org, 84 www.economist.com/markets/bigmac/index.cfm, 150 www.eurobor.org, 273 www.euroclear.com, 318 www.euronetting.com, 484 www.euronetting.com, 485 www.exim.gov, 491 www.eximbankindia.com, 492 www.export.gov, 490 www.fasb.org, 246 www.federalreserve.gov/releases/H10/hist, 218 www.finpipe.com/intrateswaps.htm, 365 www.fiscalagent.com, 496 www.ford.com, 260 www.forexster.com, 116 www.Fxall.com, 114 www.fxstreet.com, 161 www.gcgf.org, 100 www.globaloffset.org, 492 www.ica.com/spotdemo, 138 www.icap.com, 113 www.icmagroup.org, 318 www.ifrs.org, 251 www.imf.org, 10 www.imf.org, 79 www.imf.org/external/fin.htm, 33 www.isda.org, 349 www.ishares.com, 342 www.lib.berkeley.edu/doemoff/govinfo/intl/gov_eu.html, 15 www.londonstockexchange.com, 453 www.moodys.com, 311 www.msci.com, 340 www.nasdaq.com, 330 www.nasdaqomx.com, 331 www.newyorkfed.org, 113 www.novo.dk, 437 www.numa.com/ref/exchange.htm, 176 www.nyse.com, 330, 453 www.nyx.com, 331 www.oecd.org, 19, 106 www.oecd.org/statsportal, 160 www.sec.gov/info/edgar.shtml, 212 www.see.gov/edgar.shtml, 243 www.sgx.com, 280 www.standardandpoors.com, 312 www.swift.com, 117 www.taxsites.com/international.html, 501, 518 www.theice.com, 176 www.themexicofund.com, 395 www.tmx.com, 330 www.treasurers.org, 485 www.treasurymanagement.com, 481 www.unctad.org/wir, 19 www.ustransferpricing.com, 510 www.worldbank.org, 462 www.wto.org, 14 www.xe.com/currencyconverter/full, 138 Wei, John, 339 Weighted average cost of capital, 432, 463 Wells Fargo, 290 Wenchi, K C., 339 Weston, James, 212 Whaley, Robert, 193 www.downloadslide.com 547 INDEX Wharton Econometric Forecasting, 164 White, Harry Dexter, 31 Wilshire Associates, 88 Withholding taxes international bond market and, 306 taxation types, 501 World Bank countertrade categories, 495 currency swap, 349 World beta, 371 WorldCom, scandal, 9, 82, 100 World Currency Options, 181–182 World Equity Benchmark Shares, (WEBS), 386–387 World market portfolio, 444 World’s bond markets, 304 World systematic risk, 444 World Trade Organization (WTO), 14 Worldwide taxation, 503 W.R Grace, 88 Writer, 181 X Xia, Lichuan, 344 Y Yang, T., 102 Yankee bonds, 305, 306, 307 Yankee stock offerings, 334 Yeung, Bernard, 417 Yukos, Russian oil, Z Zero-coupon-for-floating rate swap, 358 Zero-sum game, 174 Zhang, Bohui, 434 Zhou, J., 102 Zingales, L., 99 Zurich Stock Exchange, 331, 446 ... spread determined from the cross-rate formula or a triangular arbitrage opportunity exists In the forward market, buyers and sellers can transact today at the forward price for the future purchase... permeates the decision-making process we present from cover to cover To reinforce the managerial perspective, we provide numerous “real-world” stories whenever appropriate Part FOUR World Financial. .. sharply, whereas that of registered shares rose sharply This implies that there was a major transfer of wealth from foreign shareholders to domestic shareholders Foreigners holding Nestlé bearer